Feds to Peddle Bad Bank Assets to Private Sources

February 9, 2009

The Treasury Department has pushed from Monday to Tuesday its planned announcement of further bank bailout measures, and Obama economic advisor Larry Summers suggested Sunday that some of the banks’ devalued assets — referred to variously as “toxic,” “bad,” and (at the Times) “contaminating” — might by offered for sale to private financial firms. The Feds had been considering the creation a “bad bank,” suggested at the Wall Street Journal and elsewhere, that would remove these assets from the general banking system, in hopes this would encourage the troubled banks to start lending again. Summers suggested that with the “right kinds of financing, strategic approaches” — that is, with government loans and good terms — private investors such as equity funds could be encouraged to buy these assets in hopes of realizing gains on them later.

The Calculated Risk blog says such a plan “would definitely increase the price investors would be willing to pay for toxic assets, as compared to current market values (while putting the taxpayers at risk)… But I think most banks will have to take further write downs and will need additional capital.” His readers are not so optimistic. “I actually believe that there are ways to solve the banking problem,” says one, “but they would require Obama and company to ask Congress for roughly $5 Trillion, all at once. Politically impossible. So instead, the taxpayers are going to slowly bleed the trillions — hundreds of billions at a time.” (Correction, 1:45 pm: Calculated Risk was originally listed as a Times blog.)

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